If I buy 1K calls on ZYX stock, how do MMs hedge their pos?

Discussion in 'Options' started by Optionpro007, Aug 27, 2005.

  1. Here's a question re: MM

    If a retail trader has direct market access, i.e. can sell on the offer and buy on the bid, what advantage, if any, does a market maker have over a retail trader ?
    #31     Aug 30, 2005
  2. nitro


    1) Retail traders are forbiddend from making a two sided market.

    2) MMs have comissions to die for.

    3) MMs have access to nearly unlimited capital and can offset trades almost instantly

    4) Most retail traders have cancel fees.

    Any one of those will kill you if you don't have it. All four and, well...

    #32     Aug 30, 2005
  3. 1) Not in the UK, which is all I trade.
    2) They also have overheads and wage bills to die for.
    3) True, but would that affect the return on Capital ?
    4) Again, not in the UK.
    #33     Aug 30, 2005
  4. Thanks Profit.

    Ordered it already.

    Cheers !!
    #34     Aug 30, 2005
  5. Riskarb and others:

    1.- My bad, I came to the conclusion that everybody who is saying I am being paranoid are completely right. I have taking it personally when a market has moved against "me" when in reality it has been moved against "all traders" who have the same position I have had.

    Sadly this means I can get screwed only becuase the floor figures out a position another big trader has, imo.

    You say:

    "You'll know whether the market is fair via p/c parity and the pricing of the same-strike put."

    Could you elaborate on this ?


    Is low volume/large price move the only indicator which could possibly tell me if the move is being originated from the floor ?

    Thanks a million !!!
    #35     Aug 30, 2005
  6. That's a new one on me. Put / Call parity has nothing to do with fair value, rather Put / Call values must balance to ensure no arbitrage possible. If they didn't an arbitrageur would zap the difference and bring them back into line. Fair value (in the forward sense) is simply spot + risk free interest - expected dividends, i.e. Spot + cost of carry.

    I'd also be interested in what riskarb means by "<b>They'll skew the market in the DITM"</b> ?
    #36     Aug 30, 2005
  7. Look to the same-strike put to determine the extrinsic premium embedded in the call. Same strike puts and calls trade at = vols, but not necessarily $prem. It has everything to do with "FairVal" "ThVal" of the options. The forward-spot calc and distribution prices $calls/$puts > x, but so slightly in this rate-environment that it's not worth discussing, any more than rho of the average position.
    #37     Aug 30, 2005
  8. #38     Aug 30, 2005
  9. #39     Aug 30, 2005
  10. And I thought I knew my way around traded options ! Either you're talking complete pish or I'm clueless.

    Which ?

    If it's the later I look fwd to being re-educated.
    #40     Aug 30, 2005